Order 15735 - Narr. Elec. Co.: Contract Termination Charge

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

REPORT AND ORDER

On July 27, 1998, the Narragansett Electric Company  [1 Narragansett is a wholly owned subsidiary of New England Electric System ("NEES"), an integrated public utility holding company. Narragansett is engaged primarily in the distribution of electricity to approximately 330,000 customers located in 27 Rhode Island cities and towns. Narragansett has purchased all of its energy requirements from the New England Power Company ("NEP"), NEES's wholesale generating and transmission subsidiary. The power has been purchased under the terms of a long-term all-requirements contract, the terms and prices of which have been regulated by the Federal Energy Regulatory Commission ("FERC").]  (the "Company" or "Narragansett") filed several rate changes with the Public Utilities Commission ("Commission") pursuant to R.I.G.L. Section 39-3-10.  [2 The Company has proposed that the changes become effective for usage on and after either (i) the closing date for NEP's divestiture, or (ii) if Commission approval cannot be obtained until after the divestiture, the date designated by the Commission in its order.]  The purpose of the rate changes is to reduce Narragansett's rates to reflect a reduction in the cost of power it purchases from its affiliate, the New England Power Company.

This is the third filing made to satisfy Narragansett's obligations under the terms of a settlement agreement dated May 30, 1997 ("Settlement Agreement") amongst Narragansett, NEP, the Division of Public Utilities and Carriers ("Division") and the Commission. The Settlement Agreement was filed with, and approved by, the FERC. The Settlement Agreement provides, in relevant part, for the implementation of Rhode Island's Utility Restructuring Act of 1996, as amended ("URA"). The general objective of the URA is to deregulate electric power supplies and allow the development of a competitive market for the purchase and sale of electricity.

Public hearings were held on September 16, 23 and 24, 1998. The following appearances were entered in this proceeding:

FOR THE COMPANY                       Ronald T. Gerwatowski

Thomas Robinson

FOR TEC-RI                                       Andrew Newman

Rubin and Rudman LLP

FOR THE DIVISION                          Paul J. Roberti

Chief, Public Utilities Regulatory Unit

Special Assistant Attorney General

FOR THE COMMISSION                 Adrienne G. Southgate, General Counsel

Lindsay Johnson, Special Counsel

I. INTRODUCTION

NEP's tariff consists of a two-part rate.  [3 Tr. 9/23/98, p. 65.]  One part is a contract termination charge ("CTC"), initially set at 2.8[cent] per kilowatt-hour ("kWh") pursuant to the URA and the Settlement Agreement, designed to allow NEP to recover anticipated losses to be incurred on the divestiture of power purchase contracts, generating plant, and equipment previously dedicated to serving Narragansett and other wholesale customers.  [4 Id.; Ex. NEC-3, pp. 7-17; R.I.G.L. Section 39-1-27.4(a)-(b).]  Narragansett's rates, in turn, contain a transition charge ("Transition Charge") of 2.8[cent] per kWh to recover its CTC expense from its retail customers. [5 R.I.G.L. Section 39-1-27.4(e).]  The Settlement Agreement and the URA provide for subsequent adjustments to the 2.8 cents Transition Charge and CTC to account for any gains or losses incurred by NEP upon the divestiture of its generating property. [6 R.I.G.L. Section 39-1-27.4(g); Ex. NEC-16, Appendix 1, pp. 8-12 of 27.]

The other part of NEP's rate is the Standard Offer charge, and it recovers all other costs of supplying power to Narragansett.  [7 Prior to January 1, 1998, this charge was based primarily upon traditional billing determinants of peak demand and energy usage. The cost of service under these rates varied depending upon how much power was used and when it was used. Narragansett, in turn, billed these costs to its retail customers based primarily upon varying usage patterns of different classes of customers. The basic objective of the existing rate design is to require each customer to pay the additional costs imposed upon Narragansett as a result of that customer's usage. Accordingly, the Company has had different rates for different classes of retail customers including residential, commercial and industrial, streetlighting and time-of-use rates.]  On January 1, 1998, pursuant to the terms of the Settlement Agreement, NEP's tariff was modified and this portion of the rate was billed as a flat energy charge of 3.2[cent] per kWh.  [8 Order No. 15489, dated December 17, 1997, at pp. 5-6.]  This produced a $44,000,000, or 22%, reduction in the cost of purchased power to Narragansett.  [9 Id.]  Narragansett had filed proposed Standard Offer  [10 "Within three (3) months after retail access is available to forty percent (40%) or more of the kilowatt-hour sales in New England and extending through year 2009, each electric distribution company shall arrange for a standard power supply offer ("Standard Offer") to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers. The power supply contract required for the standard offer shall be awarded by public competitive bidding to the lowest-priced power supplier...." R.I.G.L. Section 39-1-27.3(d).] rates on October 10, 1997 to reflect this cost reduction in its retail rates. Narragansett had considered reflecting the purchased power cost reduction in its retail rates by adopting a uniform rate of 3.2[cent] per kWh ("Uniform Price").  [11 Order No. 15489, dated December 17, 1997 at pp. 6-7.]  This approach would have produced a simplified, flat rate structure while satisfying the basic objective of requiring each customer to pay for the cost of the service provided. [12 Id.]  When combined with the 2.8 cents per kWh Transition Charge, however, Narragansett's rate for all customers would be a flat charge of 6.0 cents per kWh, a rate increase for some classes. While this rate structure offered certain advantages, Narragansett "did not want to adopt the Uniform Price [for Standard Offer rates] without the implementation of other measures to mitigate the impact on customers' bills".  [13 Ibid. at p. 7.]

Alternatively, Narragansett considered reducing the power costs embedded in each retail class rate by 22% to account for the savings attributable to the lower NEP rate.  [14 Id.]  The advantage of this approach ("Designed Pricing") is that it would "minimize the number of customers receiving bill increases." [15 Id.]  The disadvantages of the approach are "that it would result in each rate class paying a different price for the service even though Narragansett's cost for the power is uniform," and it would "make it more difficult for non-regulated power suppliers to compete for the business of many of the Company's high-usage customers."  [16 Id.]

Ultimately, Narragansett proposed a phase-in of the Uniform Price that would utilize a substantial gain expected to be realized upon the sale of its non-nuclear generating facilities ("Residual Value Credit") during the second half of 1998. Under the terms of the URA and the Settlement Agreement, this Residual Value Credit would be used to reduce NEP's CTC charge to Narragansett.  [17 Ibid., at p. 4.]  When reflected in retail customers' bills, this reduction in Narragansett's CTC expense would largely eliminate any increases produced by the adoption of a Uniform Price for Standard Offer Service. [18 Ibid., at p. 8.]  Accordingly, Narragansett proposed that Designed Pricing be adopted until NEP could reduce the CTC by the anticipated Residual Value Credit. [19 Id.]  When the Residual Value Credit was reflected in billings, Narragansett would then adopt a Uniform Price with minimal bill increases. [20 Id.]  In other words, the implementation of a Uniform Price would be delayed until the gain on the sale became available to stabilize rate changes.

In late December 1997, the Commission adopted the Designed Pricing proposed by the Company without making any commitment on future rate changes. [21 See, Order No. 15489, dated December 17, 1997.]  The Commission found, however, that the rates did not qualify as Standard Offer rates because they did not adhere to the requirements of the URA.  [22 Specifically, the Commission found that the proposed rates did not qualify as Standard Offer rates because Narragansett did not comply with the competitive bidding requirements of R.I.G.L. section 39-1-27.3(d). See Order No. 15489, dated December 17, 1997, p. 12.]

On April 10, 1998, after satisfying the competitive bidding requirements of the URA  [23 R.I.G.L. section 39-1-27.3(d). No bids were received at less than 3.2 cents, however.], Narragansett refiled the rates approved by the Commission on December 17, 1997 as Standard Offer Rates. The Commission approved the refiled rates as Standard Offer Rates on July 10, 1998.  [24 See Order No. 15639, dated July 10, 1998.]

On July 27, 1998, Narragansett again refiled the Standard Offer rates. The proposed rates were modified to include a 1.3 cents per kWh reduction in the Transition Charge and a Uniform Price for Standard Offer Service and for the Transition Charge. These changes were proposed in anticipation of a 1.3 cents reduction in the NEP CTC charged to Narragansett, which was scheduled to become effective on September 1, 1998. The projected reduction in the CTC was based upon the estimated gain NEP expected to realize on the sale of its non-nuclear generating assets to USGenNE and on the sale of power purchase contracts. In fact, on September 1, 1998, NEP reduced the CTC being charged to Narragansett from 2.8 cents to 1.5 cents pursuant to the URA  [25 R.I.G.L. section 39-1-27.4(g).] and the Settlement Agreement as modified by a FERC Order dated February 25, 1998.  [26 Id. The Company presented projections of the CTC that showed the rate declining to 1.07 cents in 2001 and steadily declining thereafter to .12 cents in 2010 and .06 cents in 2029. Ex. NEC-1, Exhibit JMM-2, p. 1 of 15. Mr. Molloy testified that the rate would not be increased above 1.5 cents. Ex. NEC-1, p. 4.]

II. THE PROPOSED RATES

The proposed rates are principally intended to change Narragansett's rates to incorporate the new cost of power being purchased from NEP and USGenNE.  [27 Pursuant to the sales agreement, USGenNE has the responsibility to continue to provide Standard Offer Service to Narragansett's existing customers who were customers as of January 1, 1998, and NEP has the responsibility to supply new customer load not otherwise obtained from another supplier.]  Specifically, the Transition Charge has been reduced to 1.5 cents to reflect the lower CTC from NEP, and the Standard Offer rates incorporate a Uniform Rate of 3.2 cents. The Standard Offer rate is scheduled to increase to 3.5 cents, to become effective on January 1, 1999.  [28 Ex. NEC-1, pp. 3, 9.]

In addition, the proposed rates contain a provision that requires an annual reconciliation of the Transition Charge revenues collected by Narragansett from its customers, and the CTC paid to NEP. [29 Ibid., at pp. 6-8.]  The provision adjusts rates to account for any over- or under-recovery of the Transition Charge. The final rate change revises and simplifies the tariffs so that the Transition Charge rate and the Transmission rate are stated on each tariff cover sheet and not in the body of the tariff. [30 Ibid., at p. 18.]

The Company also requested approval of a credit for the A-60 Low Income Rate in order to maintain the low-income percentage discount off general residential rates.

III. THE COMPANY'S CASE

Narragansett presented the testimony of four witnesses who testified in support of the filed rates.

A. Jennifer L. Kenney and Terry L. Schwennesen

Narragansett presented testimony on the calculation of NEP's 1.5 cents CTC. Two witnesses jointly sponsored this testimony. The first, Jennifer L. Kenney, is Manager of Finance for New England Power Service Company ("NEPSCO"). The second, Terry L. Schwennesen, is NEPSCO's Manager of Rates. These witnesses explained the terms of the Settlement Agreement and presented the calculations in support of NEP's 1.5 cents CTC.

B. Mr. James M. Molloy

Mr. Molloy, Rate Analyst for NEPSCO, testified for Narragansett in support of the following proposed rate changes:

1. Lower the Transition Charge from 2.8 cents  [31 Mr. Molloy testified that all rates with the exception of the G-62 and E-40 rates have included the uniform 2.8 cents Transition Charge. For E-40, the Transition Charge is recovered on a time-of-use basis. The existing G-62 rate was designed to recover a 2.8 cents Transition Charge through an energy rate and a demand charge. The G-62 Rate had under-recovered Transition Charges by approximately $525,000 through August 1998. Rec. Req. 12.] to 1.5 cents.  [32 Mr. Molloy testified that the CTC, which the Transition Charge is designed to recover from retail customers, would not rise above 1.5 cents in the future. Ex. NEC-1, p. 3. He presented a forecast of the CTC that showed it declining as described in fn. 26, supra. The final determination of the CTC charges will be governed by the terms of the FERC Settlement and the settling parties retain the right to dispute this determination. Ex. NEC-1, p. 6. The forecast presented by Mr. Molloy is based upon the assumption that USGenNE and NEP will be providing power to Narragansett at the price schedule that was established in the FERC Settlement. Ibid. at p. 9.]

2. Adopt a Uniform Price Standard Offer rate of 3.2 cents per kWh with an increase to 3.5 cents on January 1, 1999.

3. Adopt a reconciliation provision similar to the existing Standa rd Offer Adjustment Provision that would provide for an annual reconciliation of Narragansett's Transition Charge revenues and CTC expenses.

4. Modify the tariff cover sheets to include all charges and remove the charges for Transmission and Transition costs from the text of the tariff.

Mr. Molloy testified that Narragansett favored a Uniform Price because it would "precisely match the costs incurred by Narragansett for Standard Offer Service to the price charged to end-users at the retail delivery level."  [33 Ex. NEC-1, p. 9.]  On a company-wide basis, revenues from all customers would be reduced by 12.41%.

Mr. Molloy also testified on the potential impact on rates of the statutory price cap imposed by the URA,  [34 R.I.G.L. section 39-1-27.3(d); Ex. NEC-1, pp. 11-16.] indicating that the price cap could be applied to (i) total company revenues, (ii) revenues from each rate class or (iii) revenues from each individual customer.  [35 Ex. NEC-1, pp. 11-16.]  He testified that if it were applied to total company revenues, the price cap would be 10.9 cents per kWh, substantially higher than any of the proposed rates.  [36 Ibid., at pp. 11-12.]  In other words, all of the proposed rates would be less than the URA price cap.

Alternatively, if the cap were applied to the revenues from each rate class, the proposed Uniform Prices for Streetlighting and Storage Cooling would exceed the URA price cap.  [37 Ibid. p. 12.]  Accordingly, the Uniform Price for Streetlighting would be limited to 1.244 cents and the Uniform Price for Storage Cooling Rate E-40 would be limited to 2.894 cents. To make up for this loss in revenue, the Uniform Rate for all other customers would need to be raised to 3.223 cents.  [38 Mr. Molloy testified that in the event the Commission adopted this interpretation of the URA price cap, Narragansett would not propose to establish 1999 rates in the filed rates. Ex. NEC-1, p 13.]

Finally, Mr. Molloy testified that the application of the URA price cap on the basis of individual customer revenues would lead to "absurd and unfair results."  [39 Id.]  His opinion was based upon the fact that similarly situated customers would pay different rates which, he contended, would be unreasonably discriminatory.  [40 Id.]  The record indicates that if the URA price cap were applied on the basis of individual customer revenues, rates for 1,878 Streetlighting customers, 650 Traffic Signal customers, 14 Storage Cooling customers, and 1 G-32 customer would exceed their respective individual price cap.  [41 See Ex. TEC-RI-A, 1-4.]

C. Mr. Michael J. Hager

Mr. Hager, Standard Offer Portfolio Manager for NEPSCO, testified on the results of Narragansett's RFP for Last Resort Service.

IV. THE DIVISION'S CASE

The Division presented the testimony of Dr. John K. Stutz, Vice President of Tellus Institute. Dr. Stutz recommended approval of the proposed rates with one exception: he recommended that the Company retain Designed Pricing for Standard Offer Service. He testified that Designed Pricing offers the following advantages:

The major electric utilities serving Rhode Island will continue to use the same method -- designed pricing -- to set changes for Standard Offer service. Designed rates of Standard Offer service can be implemented for the three major electric utilities without producing any rate increases for customers. The same is not true for a uniform Standard Offer rate.

Designed pricing would provide an opportunity to change the structure of the charges for Standard Offer service more gradually, thus promoting rate stability.  [42 Ex. DPU-1, pp. 7-8.]

Dr. Stutz noted, however, that there were also benefits to a Uniform Price.

With designed pricing, charges for Standard Offer service are more complex and future charges may be difficult to anticipate. With flat, per-kWh pricing, current and future charges are much clearer. With designed pricing, revenues from Standard Offer service will not automatically match the cost of the service to the Company. This will necessitate the implementation of a true-up mechanism. Flat, per-kWh pricing avoids this and the attendant issue of how to treat a Standard Offer over or under recovery.  [43 Ibid., at p. 8.]

Dr. Stutz also expressed his opinion on how the URA price cap should be applied.

I believe it is most reasonable and appropriate to apply the Price Cap on a Company-wide basis. In my opinion the procedure specified for computing the cap best describes the development of a Company-wide average.  [44 Ibid., at p. 10.]

V. TEC-RI'S PROPOSAL

TEC-RI is a consortium of large energy users that take service from Narragansett primarily under Rates G-32 and G-62. TEC-RI submitted a position statement opposing the proposed rates because they caused an unwarranted "shift in revenues among rate classes" and "violate the price cap provisions" under the URA.  [45 The Energy Council of Rhode Island Position Statement, September 10, 1998.]  Alternatively, TEC-RI proposed:

. . . that the net savings from divestiture, including the impact of a change in the design of the Standard Offer, should result in the same per kilowatt-hour reduction for each rate class of approximately $.013 per kWh provided however, in no case should a rate class have a negative transition charge.  [46 Ibid., Ex. TEC-RI-1-8.]

VI. FINDINGS

A. IMPLEMENTATION OF RATE CHANGES

1. Price Cap

The URA places a cap on prices and charges that may be imposed by an electric distribution company.  [47 R.I.G.L. section 39-1-27.3(d).]  The pertinent Section provides as follows:

The Standard Offer shall be priced such that the average revenue per kilowatt-hour received from the customer for such power together with approved distribution, transmission and transition charges shall equal the price that would have been paid under rates in effect during the twelve (12) month period ending September 30, 1996 adjusted annually for eighty percent (80%) of the change in the consumer price index for the immediately preceding twelve (12) month period . . . .  [48 Id.]

The problem with this provision is that it is not obvious how the cap should be applied. The provision places a cap on the "average revenue per kWh received from the customer".  [49 Id.]  It is not clear whether this test applies to each customer, each customer class or to total revenues from all customers. The Commission unsuccessfully sought a judicial interpretation of this provision by filing for Declaratory Judgment from the Superior Court.

The Company and the Division have taken the position that the legislative intent is that the price cap be applied on a Company-wide basis. The Division's argument, as presented by Dr. Stutz, emphasized that the language of the statute favored a Company-wide price cap:

Taken in context, I read the phrase ". . . the average revenue per kilowatt-hour received from the customer . . ." to refer to customers generally and as a group, just as the term "the ratepayer" is used to refer to all ratepayers. The language in the URA requires that the average revenue per kWh ". . . shall equal the price that would have been paid under rates in effect . . ." The reference to "the price" (singular) based on "rates" (plural) suggests a Company-wide average calculation of the type shown in Mr. Molloy's Exhibit JMM-6. I interpret the "price" to be the average price resulting from all the rates in effect at the time. Thus, a Company-wide calculation is called for.  [50 Ex. DPU-1, pp. 9-10.]

The Company's argument, presented by Mr. Molloy, emphasized that only a Company-wide price cap would produce a logical result:

It is the Company's position that the most sensible way to apply the rate cap is on a total company basis. The [company-wide] approach is fair, non-discriminatory, and administratively straightforward. Moreover, it is consistent with the concept of encouraging customers to go to market. If the rate class method were adopted, it creates highly favorable rates for Street Light and Storage Cooling customers, at the expense of other customers. Considering these classes should otherwise be prime candidates for marketers because of their off peak usage, the implementation of cross-subsidies for these classes is not necessary to produce reasonable prices to these customers. Finally, the customer-by-customer approach is harmful to competition, contrary to traditional principles of non-discriminatory ratemaking, administratively complex, and costly to implement. The Commission should reject it.  [51 Ex. NEC-1, p. 16.]

It is clear that unless a Company-wide price cap is adopted, several rates will be capped at prices that are significantly below cost.  [52 Ex. NEC-1, Ex. JMM-7; See rates E-40/E-41 and St. Light.]  In the case of Street Lights, the rate cap would result in a Standard Offer rate of less than 50 per cent of the cost of the power. This shortfall would have to be recovered from other customers. The Declaration of Policy  [53 R.I.G.L. section 39-1-1.] does not support this result. The Declaration of Policy provides that it is the policy of the state "to provide just and reasonable rates and charges for . . . such services and supplies, without unjust discrimination, undue preferences or advantages" and "to promote competition".  [54 R.I.G.L. section 39-1-1(b)-(c).]  Establishing rates that are substantially below cost is not consistent with the Declaration of Policy. Accordingly, the Commission finds that the price cap provision of the URA must be applied on a Company-wide basis to be consistent with the Declaration of Policy.

The Commission has expended a great deal of time and energy in its efforts to implement the URA. The Commission's basic objective in these efforts is to effectuate the URA by creating a competitive market for the purchase and sale of electricity. A competitive market can be created only if each electric distribution company is required to establish cost-based rates that promote head-to-head competition with alternative suppliers. Clearly, cost-based rates cannot be achieved unless the price cap is applied on a company-wide basis. If the price cap is applied on a customer-by-customer basis  [55 The Commission finds nothing in the URA to suggest that the legislative intent is to apply the price cap on a rate class basis.] it results in a chaotic rate structure because it creates a multitude of different rates, many of which will be priced below the cost of service. [56 If the price cap were applied to customer classes, the number of rates would not be excessive but a number of rates that apply to many customers would still be priced below the cost of service. See Ex. NEC-1, JMM-7; compare Ex. NEC-1, JMM-8.]  Accordingly, the Commission finds that the price cap must be applied on a company-wide basis to implement the intent of the URA to create a competitive market for the purchase and sale of electricity.

2. Rate Stability

The proposed rates contain two separate rate changes for retail customers. The first rate change would reduce the Transition Charge from 2.8 cents to 1.5 cents as of the effective date of this Order. Second, the proposed rates contain a scheduled increase in the Standard Offer to 3.5 cents effective on January 1, 1999. In addition, the Transition Charge would change in December 1998, when NEP files a reconciliation of its preliminary financial estimates of the Residual Value Credit with the FERC. Thus, Narragansett's retail customers could experience three rate adjustments over a two-month period.

The Commission's long-standing policy is to promote rate stability and to avoid unnecessary fluctuations in rates. Minimizing the rate changes in this fashion should promote competition by providing competitors with a relatively stable fixed price against which to compete. More specifically, the Commission seeks to avoid a rate decrease on September 1, 1998 followed by a rate increase on January 1, 1999. To implement all changes at one time will give customers a clearer price signal. Accordingly, the Commission finds that all rate changes, unless otherwise ordered, should become effective on January 1, 1999.

B. RATE STRUCTURE

Narragansett is proposing the adoption of a Uniform Price of 3.2 cents per kWh that will increase to 3.5 cents on January 1, 1999 when NEP's purchased power rate increases to 3.5 cents. Under the proposal, each retail customer would be required to pay the same per kWh charge for purchased power that NEP charges Narragansett.

The Division objects to the Uniform Price proposed by Narragansett and alternatively proposes that the currently effective Designed Pricing be retained. The Division supports its position by arguing that (i) all of the major utilities will be using Designed Pricing and (ii) Designed Pricing will produce more gradual rate changes with less impact on customers' bills.  [57 Ex. DPU-1, pp. 7-8.]

The Commission rejects the Division's position. Public utility rates are required to be reasonable, just and nondiscriminatory.  [58 R.I.G.L. section 39-2-1 and section 39-2-2.]  The standard for determining whether rates are reasonable, just and nondiscriminatory is whether the rates are cost-based.  [59 United States v. Public Utilities Commission, 120 R.I. 959, 967, 393 A.2d 1092 (1978); J. Bonbright, Principles of Public Utility Rates, Columbia University Press (1960) pp. 61-81.]

Prior to the implementation of the Settlement Agreement rates, measuring the cost of providing service to customers was complex and highly subjective. The Settlement Agreement rates, however, initially consist of a flat 2.8 cents transition Charge and a flat 3.2 cents Standard Offer rate for each kWh of consumption. This simplified rate structure makes it easier to measure the cost of providing service to each customer. Accordingly, Narragansett has proposed that its retail rates reflect the same charges per kWh that Narragansett pays to its wholesale supplier, so that, in essence, Narragansett will simply flow through to its customers the costs incurred to purchase power.

The Division has not presented adequate reasons for setting rates based upon factors other than cost.  [60 The Division's witness Dr. Stutz apparently contends that costs should not be measured by the price Narragansett now pays to purchase power but rather by the cost Narragansett was incurring to purchase power from NEP prior to the divestiture. Tr. 9/23/98, pp. 85-86. In other words, Dr. Stutz seems to argue that the Designed Pricing is cost-justified, based upon the costs incurred by Narragansett under the wholesale rates in effect prior to NEP's sale of its non-nuclear generating assets to USGenNE and prior to the Settlement Agreement. The Commission rejects this position because it does not reflect the existing economic realities.]  While there would be advantages if all of the Rhode Island electric distribution companies adopted similar rate designs, the Commission will not base Narragansett's rates on the speculation that Designed Pricing will be adopted for other companies. Similarly, the Division has failed to establish that the proposed cost-based rates for Narragansett result in price changes that are unreasonable. Accordingly, the Commission finds the proposed Standard Offer Uniform Price to be fair and reasonable and approves the proposed 3.5 cents Uniform Price to become effective on January 1, 1999.

C. LOW INCOME CREDIT

To maintain the historic discount percentage to low-income customers, Narragansett is proposing a Rate Credit.  [61 Ex. NEC-1, pp. 9-11.]  For the 3.2 cents Standard Offer Uniform Price, the corresponding Rate Credit is .217 cents; for the 3.5 cents Standard Offer Uniform Price the corresponding Rate Credit is .227 cents.

While rate discounts are a departure from cost-based pricing, discounts for low-income customers have become a basic and important feature of the Company's rates that perform an important public service. Accordingly, the Commission finds the Rate Credit to be fair and reasonable and approves the .227 cents Rate Discount to become effective with the 3.5 cents Standard Offer Uniform Price on January 1, 1999.

D. TRANSITION CHARGE

As of September 1, 1998, NEP reduced the CTC from 2.8 cents to 1.5 cents. Narragansett now proposes to similarly reduce its Transition Charge from 2.8 cents to 1.5 cents in order to pass these cost savings on to its customers.

TEC-RI opposes Narragansett's rate change and proposes that cost savings arising from the reduction in the CTC be allocated to each rate class to produce a uniform savings of approximately 1.3 cents per kWh for all rate classes after the adoption of the Uniform Price.  [62 The Energy Council of Rhode Island Position Statement, December 1, 1998.]  Under the TEC-RI proposal, Narragansett would incur a uniform cost of 1.5 cents for each kWh purchased, but the Transition Charges to customers would vary. The following table gives examples of the variations in the Transition Charge under the TEC-RI proposal:

The Commission rejects this proposal because TEC-RI has not presented any convincing reason to support this departure from cost-based rates.

Since the Company filed its proposed rates, several things have happened that bear upon the determination of the appropriate Transition Charge. First, on December 1, 1998, NEP filed a "Reconciliation" of actual costs to the estimated costs used to calculate the 1.5 cents CTC. This reconciliation resulted in the CTC being reduced to 1.38 cents. Second, because Narragansett's Transition Charge was not reduced on September 1, 1998 to reflect the 1.5 cents CTC which became effective on that date, Narragansett's Transition Charge collections have exceeded the amount of CTC charges paid to NEP by approximately $21,150,000.  [63 Tr. 12/17/98, p. 30.]

During the hearings, the Commission proposed that this over-collection should be used to reduce the amount of the ongoing Transition Charges by making a prepayment of the over-collection to NEP in order to lower the CTC. On December 8, 1998 the parties met at a technical session and discussed the Commission's proposal and four other proposals presented by Narragansett.  [64 Ibid., at p. 11.]  The Company's witness Ms. Schwennesen testified that the consensus of the parties at the technical session was that the over-collection should be paid to NEP to reduce the CTC.  [65 Id.]  The reduction in the CTC would, in turn, reduce the Transition Charge from 1.38 cents to 1.15 cents for the years 1999 and 2000.  [66 Ibid., at pp. 10-11, 16.]

The Commission wishes to express its appreciation to all of the parties, including Narragansett, for the time and effort that each spent to explore this innovative treatment of the over-collection. The reduction in the Transition Charge amounts to $24,400,000 over the two-year period.  [67 Ibid., at p. 21.]  This reduction refunds the over-collection of $21,400,000 and produces at least $2,000,000 in additional savings to ratepayers.  [68 Tr. 12/17/98, pp. 30-31.]  This result is innovative because it produces savings to ratepayers without cost to Narragansett or NEP. Accordingly, the Commission finds the Transition Charge of 1.15 cents to be reasonable and approves it to become effective on January 1, 1999.

The net result of the Commission's deferral of the Transition Charge reduction from September until January provides both short and long-term benefits to ratepayers. Rate stability has been a major consideration in the Commission's actions. Customers now see a smooth and untrammeled transition from the original Standard Offer Rates with Design Pricing, to increased Standard Offer Rates with Flat Pricing, without experiencing any rate increases because of the off-setting impact of the Transition Charge reduction. That reduction has been significantly enhanced through the Commission's oversight, from the originally filed 1.5 cents to the approved rate of 1.15 cents. Moving to Flat Pricing should enhance the development of a competitive market in electricity. Meanwhile, ratepayers will see a net reduction in their CTC obligations of over $2,000,000. Finally, the G-62 undercollection of approximately $600,000 has been conclusively addressed  [69 See Order No. 15719, issued October 30, 1998. By opting to handle the undercollection through the Transition Charge savings, the Company has constructively waived any further claim to these monies.]

E. TRANSITION CHARGE ADJUSTMENT PROVISION

Narragansett has proposed a new tariff provision that would require the Company to reconcile on an annual basis its total Transition Charge revenues against CTC charges from NEP and to recover or pay back any over- or under-collection of Transition Charges from customers. The provision is nearly identical to the Standard Offer Adjustment Provision, which is currently in effect to allow reconciliation and true up of the revenues and cost of Standard Offer service. The Commission finds the provision to be fair and reasonable and approves it.

F. OTHER TARIFF CHANGES

The Company has proposed a revision to its tariffs that would place all charges on the cover sheet and remove the Transition Charge rate and the Transmission Rate from the text of the tariffs.  [70 Ex. NEC-1, p. 18.]  The Commission finds the proposed changes to be fair and reasonable and approves them.

Accordingly, it is:

(15735) ORDERED

1. That the proposed Standard Offer Uniform Price of 3.5 cents is approved to become effective for consumption on and after January 1, 1999.

2. That the .227 cents Rate A-60 Low Income Rate Credit is approved to become effective with the 3.5 cents Standard Offer Uniform Price for consumption on and after January 1, 1999.

3. That a Transition Charge of 1.15 cents is approved to become effective for consumption on and after January 1, 1999.

4. That the Transition Charge Adjustment Provision is hereby approved.

5. That the tariff changes placing the Transmission and Transition Charges under each tariff on the cover sheet of the tariffs and, in some cases, removing them from the text of the tariffs, are approved.

6. That the Company shall act in accordance with all other findings and instructions contained in this Report and Order.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND PURSUANT TO OPEN MEETING DECISIONS ON OCTOBER 21, 1998 AND DECEMBER 18, 1998. WRITTEN ORDER ISSUED DECEMBER 31, 1998.

PUBLIC UTILITIES COMMISSION